Persian Gulf States - Kuwait Oil Industry

More about the Economy of Kuwait.

Oil industry

For centuries, oil seepages in the desert had indicated oil below the surface. This oil came to the attention of European and United States developers. In 1911 the Anglo-Persian Oil Company (APOC), which was developing oil fields in Iran, requested permission to negotiate a concession from Kuwait. The British government refused the request (as it was entitled to do so under an 1899 treaty that granted Britain substantial control of Kuwait's foreign policy), but two years later the British government commissioned a geological survey of the area. In 1913 the British government signed an agreement with Kuwait's Shaykh Mubarak the Great in which he promised to grant concessions only to companies approved by the British government, clarifying and reaffirming the agreement of 1899. World War I interrupted another effort to negotiate a concession. By this time, the British government had purchased 51 percent ownership in APOC as part of an effort to ensure oil supplies for the Royal Navy.

After World War I, interest in oil grew. APOC continued attempts to obtain a Kuwait concession. Meanwhile, in the 1920s, Gulf Oil of the United States began to seek concessions in the gulf to overcome its lack of crude oil sources. British treaties with most rulers in the gulf, including Kuwait, made it difficult for non-British companies to gain access, although the United States government pressured the British to provide equal treatment to United States oil firms. In 1932 Gulf Oil and APOC formed a joint company to negotiate a concession in Kuwait, and this effort received British government approval. In 1934 Kuwait's ruler, Shaykh Ahmad al Jabir Al Sabah, signed a concession agreement with the Kuwait Oil Company (KOC), the firm jointly owned by APOC and Gulf Oil.

KOC began surveying in 1935. Drilling started in 1936 on the north shore of Kuwait Bay, but no oil was found. The second attempt, in the desert, struck a gusher in 1938 in an area that subsequently was called the Al Burqan field, one of the largest and most productive fields in the world. World War II slowed the development of the industry, but at the end of the war, pipelines and other facilities were completed that could handle 30,000 barrels per day of crude oil. Commercial export of crude oil began in June 1946. Production amounted to 5.9 million barrels in 1946 and 16.2 million barrels in 1947. KOC subsequently discovered seven additional oil fields, and production continued to increase until it peaked in 1972. (In 1954 KOC's parent company, APOC, was renamed British Petroleum-- BP.)

In the years after World War II, other companies received smaller concessions, in particular for offshore oil, but KOC, which the government nationalized in 1976 (retroactively to 1975), retained the lion's share. Subsequent concessions contained progressively better terms for Kuwait, partly because of the entrance of small oil companies anxious to acquire crude oil sources and partly because of the activities and exchanges of information among oil-producing states. Payments were substantially higher, the length of concessions was shorter, schedules for relinquishing underdeveloped areas were established, and opportunities for Kuwaiti participation in the companies were increased.

The American Independent Oil Company (Aminoil) was the successful bidder for Kuwait's rights in the Neutral Zone, receiving in June 1948 a sixty-year concession for exploration and production. Aminoil, which was owned by a number of small United States oil companies, had a joint operation with the Getty Oil Company, which held the Saudi rights in the Neutral Zone. The Arabian American Oil Company (Aramco, the main developer of Saudi Arabia's oil fields) reportedly viewed the terms given Kuwait by Aminoil as unfavorable and relinquished its concession in the Neutral Zone, which Getty won. Aminoil started exploratory drilling in 1949 but did not strike oil until 1953. Production began in 1954. Production from the Neutral Zone was shared between the two countries, and Aminoil paid royalties and taxes to Kuwait, whereas Getty paid royalties and taxes to Saudi Arabia. The zone was partitioned in 1969, but the partitioning did not affect the concession arrangements.

A group of Japanese companies formed the Arabian Oil Company (AOC), which obtained concessions from both Saudi Arabia (1957) and Kuwait (1958) for exploration and production in the offshore area of the zone. AOC started drilling in 1959, and production of crude oil began in 1961. Production was shared between Kuwait and Saudi Arabia. Some AOC production was from the northern tip of Saudi Arabia's As Saffaniyah field, the world's largest offshore field. Saudi Arabia and Kuwait each purchased 10 percent ownership of AOC soon after its formation.

From the beginning of the development of the oil industry, Kuwait's leaders had wanted to participate actively in oil policy and company management. BP and Gulf Oil rejected the demands of the amir for a Kuwaiti on the KOC board of directors, but the Kuwaiti government obtained some participation in the AOC concession agreement, although it was more symbolic than real.

Frozen out of oil operations by the major oil companies, Kuwait started to develop its own proficiency in the oil industry. The Kuwait National Petroleum Company (KNPC) was formed in 1960 with the expressed intention of becoming an integrated oil company. Its founding charter allowed it to engage in almost any activity concerning oil at home or abroad. It began with 60 percent government ownership; the remaining shares were held by private Kuwaiti investors. The government bought out private investors in 1975.

KNPC started operations on a small scale, in part because of Kuwait's acute shortage of skilled workers. It bought out KOC's local oil distribution facilities and became the sole supplier of oil in Kuwait. It participated in foreign refinery operations and established subsidiaries and facilities abroad for marketing oil products. Departments for exploration and other aspects of field operations were established within KNPC to work with foreign companies in the concession area that KNPC had received from the government.

Using foreign expertise and equipment, KNPC built a modern refinery to use gas in the Al Burqan field, which would otherwise have been flared, in a hydrogenation process to convert crude oil into products and to produce sulfur as a useful by-product. Kuwait's crude is heavy and contains considerable sulfur, so the design of the refinery was excellently fitted to the local circumstances to turn out a product superior to that of a regular refinery. The refinery at Ash Shuaybah was completed in 1968, but technical problems initially caused an unprofitable mix of products. Between cost overruns during construction and a poor range of products, KNPC lost money until the problems were corrected. Nonetheless, KNPC provided useful training for Kuwaitis in upper levels of oil company management.

As oil revenues began to mount, officials increasingly favored investing a larger part of the funds in downstream and upstream oil operations. The petrochemical industry offered fewer obstacles to industrial development than most other industries. It needed relatively few workers, large capital investments, and substantial oil and gas sources--requirements that fit the country's circumstances well. Yet despite the apparent advantages, the government moved slowly, perhaps for good reason. In 1963 the Petrochemicals Industries Company (PIC) was formed, with 80 percent state ownership. It began with modest facilities but acquired additional plants over the years through purchase of other companies and construction of new facilities. In 1976 the government bought out private investors, and PIC became wholly government owned. PIC's chemical complexes were the country's largest manufacturing plants. A key ingredient was a gas-gathering system to use the gases produced in association with crude oil. Until the late 1970s, a considerable part of the gases had been flared. In addition to the gas-gathering system, the government expanded its investment in oil-refining capacity and petrochemical facilities.

Kuwait's goal of real participation in and control over its oil industry was achieved in 1976 when the government bought KOC, including the refinery and other installations. BP and Gulf Oil continued to provide technical services and personnel in return for access to oil supplies and service fees. In 1976 Kuwait concluded negotiations to purchase 60 percent of its one-half share of AOC's offshore operations. Negotiations for 60 percent of Aminoil foundered over the value of assets. In 1977 Kuwait nationalized the firm, paying compensation on the basis of an official estimate of the value of assets. Aminoil became the Kuwait Wafrah Oil Company. In 1978 operations of the Al Wafrah field passed to KOC, and KNPC took over the former Aminoil refinery and shipping terminal at Mina Abd Allah.

As oil revenues rose in the 1970s, the Kuwaiti government continued its upstream and downstream expansion, establishing the Kuwait Petroleum Corporation (KPC) as a semiautonomous state organization in January 1980 to rationalize the organizational structure of its oil industry. KPC became the country's national integrated oil company, with KOC, KNPC, PIC, the Kuwait Oil Tanker Company, and the Kuwait Foreign Petroleum Exploration Company among its more important wholly owned subsidiaries. KOC remained primarily responsible for domestic exploration and production of oil and gas, and KNPC was mainly the refining subsidiary. KPC also entered into joint ventures with and purchased shares in foreign companies involved in various aspects of the oil business. In 1981 KPC bought the Santa Fe International Corporation, a United States drilling and energy engineering firm. Other KPC activities abroad included part ownership in refineries and petrochemical plants, exploration and drilling in foreign concession areas, and purchase of retail outlets for petroleum products. By the late 1980s, Kuwait was producing 20,000 bpd in overseas holdings, primarily in the United States and in the North Sea. It was exporting 614,000 bpd as refined products. Initially, Kuwait sold this oil primarily to Japan and Pakistan, but beginning in the late 1980s, it also sold through a large West European retail network it purchased, selling oil under the logo Q8.

Oil production levels fluctuated in the period after World War II. At first, production of crude oil rose rapidly, peaking at nearly 1.1 billion barrels in 1970 before falling to more modest levels. Until 1972 much of the expansion resulted from increasing crude oil production. For the rest of the 1970s, oil production was substantially lower, but higher revenues per barrel financed continued economic growth.

With regard to prices, Kuwaiti officials followed moderate policies between conflicting objectives. Initially, Kuwait actively supported the Organization of the Petroleum Exporting Countries (OPEC), which at times required oil production levels below that necessary to cover government expenditures. Kuwait, for example, reduced oil production and exports during the Arab oil embargo associated with the October 1973 War. The Kuwaiti government believed that oil in the ground was worth more to future generations than holding such paper claims as securities and corporate shares that were subject to price inflation, exchange-rate risks, and sequestration. In 1973 the Kuwaiti government set an oil production limit of 3 million bpd under pressure from the National Assembly. In 1976 the production ceiling was reduced to 2 million bpd. In the 1980s, a surplus of oil relative to demand began to emerge on the world market, and oil prices fell dramatically. As surplus oil supplies grew, Kuwait's production ceiling was further reduced to 1.5 million bpd, although actual production was appreciably lower. But as oil prices fell, and with it revenues, Kuwait increasingly resisted OPEC's efforts to limit its production. In 1986 Kuwait reluctantly agreed to an OPEC limit of 1.25 million bpd (not counting, however, output of the Divided Zone that, during this period, was earmarked as aid for Iraq). In 1989 it refused an OPEC level of just under 1.1 million bpd. In early 1990, Kuwait produced nearly 2 million bpd, a factor that the Iraqi government cited in its decision to invade Kuwait in August.

In the 1950s and 1960s, Kuwait economically had been little more than an oil well: oil was the source of most of its revenues, and the bulk of its exports were oil, mostly crude oil. But in the 1970s, officials increased refining capacity, and by the 1980s, refined products gained in value relative to crude oil exports. By the 1980s, Kuwait controlled its hydrocarbon resources and had created an international oil company, KPC, that was among the world's largest corporations. Through its subsidiaries, KPC was involved in all aspects of the oil industry and in many countries of the world. This was a remarkable achievement in view of the fact that only twenty-five years had passed since Kuwait entered the oil industry.

Arab states of the Persian Gulf - Wikipedia
Persian Gulf - Wikipedia
Oil in the Persian Gulf | Hormuz - The Strauss Center
Foreign investment and oil industry in the Persian Gulf states
The Persian Gulf: Understanding the American Oil Strategy